Explain the meaning of the law of demand; distinguish between movements along and shifts of the demand curve.

The law of demand states that: 'as a product's price falls, the quantity demanded of the product will rise, ceteris paribus'. In other words, price and quantity demanded of a good are inversely related. This arises as a result of two two effects: an income effect and a substitution effect. The income effect states that, as a good becomes more expensive, an individual with the same level of disposable income is able to buy a smaller quantity of the good in question. The substitution effect states that, as a good becomes more expensive, individuals choose to spend their disposable income on other, less expensive goods. This assumes that suitable substitutes do exist. Thus, for normal goods, the demand curve is downward sloping. I.e. as a good's price falls, the quantity demanded of the good rises.
Movements along a good's demand curve are caused by changes in the price of the good. This relates directly to the law of demand. Shifts of the demand curve, on the other hand, are caused by changes in any non-price determinant of demand. These include changes in an individual's income, changes in an individual's tastes and preferences, changes in the price and availability of substitute goods, or demographic changes (e.g. population growth). For example, the demand for Christmas pudding, which is a seasonal good, changes depending on the season. During the Christmas period, the demand curve shifts out as, for a given price, more Christmas puddings are demanded. As Christmas ends, the demand curve shifts back in as the opposite effect takes hold.


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Answered by Tom D. Economics tutor

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